Consider This...

The Battle Over Make Allowances

Volume 133, No.
10 Friday,September 5, 2008

If there is one thing in the dairy industry that could, in theory, transcend politics, it’s make allowances. Find an accountant and an economist with no interest in dairy, give them a budget, and turn them loose on a survey and an audit of manufacturing costs in dairy plants.

Yet Congress and the dairy industry have made this dry data on cost of manufacture ground zero in the interminable battle over milk prices and federal milk marketing orders.

At this time a dairy producer motion for preliminary injunction has effectively stalled the introduction of updated make allowances in federal milk marketing order price formulas. A hearing on the injunction motion is set for Sept. 16 and USDA agreed to halt the adoption of the new make allowances until October.

The 21-page motion to stop these new make allowances offers numerous complaints, but hangs its hopes on a bit of politics tossed into the 2008 farm bill (the Food, Conservation and Energy Act of 2008 or FCEA).

In a section of the bill related to federal order decision reforms, USDA is directed to “consider the most recent monthly feed and fuel price data available and consider those prices in determining whether or not to adjust make allowances.”

This nod to dairy producer feed
and fuel costs must be “part of any hearing to adjust make allowances under marketing orders commencing prior to September 30, 2012.”

These few lines in the newly-minted farm bill, the producer lawsuit claims, are enough to halt a decision to update make allowances: “The FCEA requires an analysis of fuel and feed costs in plain, unambiguous terms and USDA implicitly and explicitly demonstrated that in this decision, it chose not to conduct that analysis and has therefore failed to comply with the FCEA,” the producer motion states.

This column is not a legal brief, but this politicization of manufacturing costs merits comment.
First, the language in the farm bill notes that this analysis of feed and fuel costs must be “part of any hearing” to adjust make allowances. However the hearing record for this decision closed before this language in the farm bill became law, and thus USDA had no directive from Congress when the hearing was in progress.

Second, USDA is asked to “consider” these producer costs, not act upon them. And this consideration isn’t to affect the make allowance levels, but only determine “whether or not to adjust make allowances.”
In the decision that lifted make allowances for cheese, butter, dry whey and nonfat dry milk, USDA does acknowledge “opponents of increasing make allowances,” on page 35324 of the June 20, 2008 Federal Register.

These opponents, USDA states, argue that “dairy farmer production costs also have increased significantly due to higher energy and feed costs,…and that make allowance increases should be made only when all dairy farmer production costs are captured in their milk pay price.”
USDA goes on to conclude: “These are not valid arguments for opposing how make allowances should be determined or what levels make allowances need to be in the Class III and Class IV product-price formulas.”

In other words, take away the politics and the mechanical effort of determining manufacturing costs at a dairy plant — the costs of electricity, plastic film, labor, cleaning chemicals — has nothing to do with how farmers or anyone else in the world are faring.

The other complaints in the injunction motion are minor or have been ruled against at previous hearings and won’t likely sway a judge to halt USDA’s implementation of make allowances in October.
In the end, politicizing make allowances and fighting over mandatory base prices for milk in federal orders is just an attempt to “game” the free market. In a free market — in a world market — the value of milk will rise and fall based on supply and demand. A dairy producer attempt to hold classified milk prices high — no matter what the market can bear — would ultimately reduce the number of solvent dairy plants.

In Wisconsin, that means fewer cheese producers, especially the medium and small cheese plants that buy milk and provide lively competition and multiple markets for producer milk. The dairy industry would do better to have low base prices for milk, lots of solvent buyers and free-market milk price premiums that find the real value of milk each month.

That’s something for USDA, and dairy producers with lawyers, to consider.

John Umhoefer has served as executive director of the Wisconsin Cheese Makers Association since 1992. You can phone John at (608) 828-4550; Fax him at (608) 828-4551; or e-mail John Umhoefer at
jumhoefer@wischeesemakersassn. org

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